Do high interest rates hurt the performance of telecommunication stocks? If so, why?

Conventional investing wisdom holds that certain types of equities have above-average sensitivity to rising interest rates, not unlike bonds. The common shares of utility companies, established oil companies and telecommunications companies (among others) become more bearish when talk of rate increases begins and investors begin looking for alternatives. Rising interest rates might hurt the performance of telecommunications stocks, but they do not necessarily do so.

The answer also depends on what is meant by "hurt performance." A stock may still perform well if it drops in price yet continues to pay dividends, or vice versa. It's important to remember the relationship between share price and yield.

Dividend-yielding Equities As Bond Substitutes

Times of falling interest rates often compel income investors to dump bonds and begin seeking dividend-yielding equities. Utilities and telecommunications companies have been historically high-yielding. This flight from bonds causes spikes in demand for blue-chip dividend stocks, which could cause share prices to appreciate and potentially reduce yields.

Rising interest rates could theoretically cause risk-averse income investors to reverse course, dumping their dividend-paying equities for senior debt purchases. In this scenario, the share price could drop, but dividends may be unaffected, increasing yield.

High Interest Rates and Capital Structure

The fundamentals of telecommunications companies could also take a hit when interest rates rise. Telecommunications companies can be quite capital-intensive and require high levels of borrowing, especially during expansion. Cash flows tend to be steady, so spikes in revenue would not be likely to offset increased borrowing costs associated with larger rates. Weakened balance sheets could be addressed by raising customer prices or cutting dividends. Companies that do not handle this well could also see their share prices drop.

However, all equities – even telecom stocks -- correlate with the stock market more closely than with interest rates.

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